Labor Market Institutions, Firm-Specific Skills and Trade Patterns

Abstract

This paper studies how cross-country differences in labor market institutions shape the pattern of international trade, focusing on workers’ skill acquisition. I develop a model in which workers undertake non-contractible activities to acquire firm specific skills on the job. In the model, workers have more incentive to acquire firm specific skills relative to general skills in a more protective labor market. When sectors are different in the dependence on these two types of skills, workers’ skill acquisition turns labor laws into a source of comparative advantage. By embedding the model in an open-economy framework with heterogeneous firms, sectors with different levels of dependence on firm specific skills, and countries with varying degrees of labor protection, I show that countries with more protective labor laws export relatively more in firm specific skill-intensive sectors through both the intensive and extensive margins of trade. I then estimate returns to firm tenure for different U.S. manufacturing sectors over the period of 1974-1993, and use the estimates as sector proxies for firm-specific skill intensity to test the theoretical predictions. By implementing the Helpman-Melitz-Rubinstein (2008) framework to estimate sector-level gravity equations for 84 countries in 1995, I find supporting evidence for the predicted effects of labor market institutions on both margins of trade.

Keywords: Labor market institutions, heterogeneous firms, margins of trade, trade patterns, firm-specific skills

JEL Classification: F10, F12, F14, F16, L22, J24